Establishing a Partnership for a Real Estate Deal

Earlier today I received an email from someone asking for help. She had found a property and a partner to purchase the property with, yet hadn’t figured out how to split the proceeds / profits / etc. The question is a good one, but I hope she was not asking it after the fact.

NEVER GET INTO A DEAL WITH PARTNERS WITHOUT HAVING A FORMALIZED REAL ESTATE PARTNERSHIP AGREEMENT

If you don’t take the time to work up a formalized agreement and purchase a property with partners, you can get yourself into some real trouble.

Make sure you consider the following things in putting this real estate partnership document together:

Who is putting up funds and how much are they giving?

What is the percentage split of funds?

Who will be actively managing the property?

What will each partner’s role be in the day to day care of the property? (consider little things like who wants to be woken up at 3 AM if the is a problem with the property)

Who will be on title?

Who will apply for the loan?

How will expenses be covered?

How will any monthly profits be split?

If sold, how will the proceeds be split?

Break things down even further and have a clear understanding of all roles of all parties. When you have figured out the roles and amounts of money that are put up for the deal, negotiate a fair balance between these to come up with percentage splits in profits, proceeds, ownership, etc. Write these down in the partnership agreement. Once you’ve completed the document, pay the extra money and have an attorney review it to be sure both parties are protected. Then, and only then, should you move forward with a deal with partners.

Are there any other points that I’m missing . . . ?

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Joshua Dorkin (@jrdorkin, Google+) founded BiggerPockets.com when he saw a need for free, trustworthy information about real estate investing online. Over the past 12 years, Josh has grown the site from self-funded hobby to full-time job and passion. Today, BiggerPockets brings together over 600,000 members, housing the world’s largest library of real estate content, iTunes’ #1 real estate podcast, and an array of analysis tools, all geared toward helping users succeed.

One of the first questions is how to take title. Tenants in common is the most common way that investors do it. However, a lot more families and/or “partners” (in the not married but committed way) are buying properties together and asking the question of “who should get the property if one of us dies”? In joint tenancy it can just switch over to the surviving owner instead of going through the deceased owners estate. Personally, I don’t know if I want to give my family a reason to root for my demise.

Another big point is purpose. Talk about why you are buying the property ahead of time. Is it to be a long term hold? Do you both agree on what long term is? Are you flipping it as soon as it has made you money?

How will future capital contributions be dealt with? If it is a long term hold, what do you do when it needs a new roof? Can one partner make the decision to put the roof on and then require the other to pay for half? What if one partner has low cash flow and the roof needs fixing immediately? A lot of investment agreements have “calls”. A call is the ability for one partner to notify the other that a contribution is required and there are time frames for response. All of these things must be written out.

These are what came to mind as I was reading this article. The bottom line is you MUST contact an attorney. There is so much more that can come up to bite you in the bottom if you are unprepared. A good attorney will try to anticipate as many problems as possible and give you a written solution in advance. That way everyone is on a level playing field and knows what will happen.

I have an investor who wants to put up 100% of the funds for purchasing a property. My role will be to renovate the property. The investor knows nothing of construction and I have all the construction experiance. I will be the 100% of the labor and he will be responsible for 100% of the investment capital. What is a fair split?

Dayan,
You pose a great question. What did you end up deciding on the split? I have a similar situation where I will put up a small portion of the investment but manage the rehabs and finding the deals. The outside investor / partner will end up putting up the majority of the funds. Any suggestions?
Jeff

EAlex –
A real estate partnership is a serious matter, and should be personalized based upon the opportunity, partners, etc. The last thing you should be doing is using some bland, generic form to solidify your partnership.

If you’re going to get into business with a partner, I think your best course of action would be to put all of your terms into writing. Then, set up a meeting with a reputable real estate attorney to formalize the agreement.

Good stuff Josh!! You definitely need a way to split the partnership up in the event that one partner wants to sell the property and the other one doesn’t. We set it up pretty simply in our agreements and that is basically like splitting up a chocolate bar. One partner breaks up the chocolate bar and the other partner chooses which piece they want. In other words … one partner sets the price they will sell their share off at, and the other partner can choose to buy it from them at that price or sell them their share. In the event that the partnership is not 50% 50% we would do a pro-rated equivalent. You could also have two separate appraisers hired and take the average of the two as the sale price. Neither method is perfect but both are pretty fair.

Bottom line is there needs to be a way out if the partnership isn’t working for whatever reason.

And I am glad you said what you said re: generic partnership agreements. For less than $1000 you can get an agreement drawn up by a lawyer and this protects everyone!! In simple partnerships it will be less than $500. If something goes wrong you’ll be spending 10x’s what it would have cost you to get the agreement drawn up just to protect your interests in the deal.
.-= Julie Broad´s last blog ..The Fallacy of the RRSP Investment =-.

Here I want your suggestion for our partnership firm.
We are two partners met and decided to establish a partnership firm for develop residential plotting scheme. We both are marketing persons and get deal with farmers. We sold out 35 % of our scheme and now a days we need of more fund my partner want to enter one another partner who will give funding but he told us fund will shared by three partners.
Right now I have no capacity to invest more. In that case what I have to do ?

Need advice on a partnership realestate purchase please.
Me and my sister are planning to purchase a home as equal partners, we will both be living in this home, pay equal mortgage, maintenance and plan to eventually rent it out in possibly the short term. She will secure the loan, we will both put down a small payment for purchase. I’m concerned with a proper written agreement, as she has had trouble with late payments and a bankruptcy in the past. I would like to pay an attorney for a contract or at least locate a free aggreement form..please give me an idea and opinion of what I need to do, a fair fee for an attorney and where I can find some free forms… Thank you…Tim